Economic times 18 May 2015
MUMBAI: Every time a loan of over Rs 50 crore goes into default, bankers will have to figure out whether the borrower is a fraudster. That’s part of a directive by the finance ministry to state-owned banks aimed at hastening the process of recovering fraudulent accounts.
The government has for the first time also created a cell in the Central Bureau of Investigation to deal with frauds detected by banks and set out guidelines for them to follow. “All accounts exceeding Rs 50 crore, if classified as NPA (non-performing assets), shall simultaneously be examined by the banks from the angle of a possible fraud. A report would be placed before the bank’s committee for review of NPAs on the findings of this investigation,” said a letter by the finance ministry to bank CEOs.
The letter titled ‘Framework for Timely Detection, Reporting, Investigation Relating to Large Value Frauds’ is aimed at hastening and streamlining the practice followed by banks in reporting frauds.
Public sector banks reported over 2,100 loan fraud cases amounting to Rs 11,022 crore between April and December 2014 as against 2,593 cases involving Rs 7,542 crore in 2013-14, according to data released by the Reserve Bank of India.
To curb this rise, the RBI said early this month it would set up a Central Fraud Registry that will house data on borrowers who cheat banks and introduced the concept of a Red Flagged Account, where banks can act on suspicion of fraudulent activity thrown up by one or more early-warning signals.
The finance ministry has said that in cases where loans have been provided by a group of banks, only one lender should file a complaint and a case should be lodged only with the joint director (policy) at CBI headquarters in New Delhi, who would be the nodal officer dealing with such frauds. “This will reduce multiplicity of work. In case of large-value loans like Zoom Developers and Winsome Diamonds, nearly 15 banks had filed cases individually in different jurisdictions even as the evidence against the defaulter is the same.
In the process, banks lost nearly 2-3 years,” said a bank CEO who did not want to be identified. The ministry is also implementing a timeline for both banks and the investigative agency. It says the CBI should register a first information report within 15 days of a bank filing a complaint.
The CBI should give a written comment to the chief vigilance officer of the bank within five working days of receiving the complaint. Banks should provide inputs sought by the CBI within four days of receiving its comments.
The finance ministry has standardised the data that banks need to provide to the investigative agency and asked them to have a nodal officer for frauds above Rs 50 crore. A sharp rise in defaults has eaten into the bottom line of banks, prompting both lenders and the RBI to take stern action against willful defaulters. According to data released by bank unions, lenders had 4,387 cases of willful defaults with outstanding loans of Rs 84,579 crore as of March 2014.
RBI's new mechanism for banks to check loan frauds
Mumbai, May 7 (PTI) The RBI Thursday put in place a new framework to check loan frauds including by way of early warning signals at banks and red flagging of accounts, while swindlers will have no access to further banking finance.
Besides, the central bank will set up a Central Fraud Registry that can be accessed by all banks to identify borrowers having committed frauds with any bank in the past.
The CBI and the Central Economic Intelligence Bureau (CEIB) will also share their databases with banks.
The concept of a Red Flagged Account (RFA) is being introduced in the current framework as an important step in fraud risk control, RBI said in guidelines for banks to deal with loan frauds.
"An RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more early warning signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may ultimately turn out to be fraudulent," it said.
No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts, it said.
Making penal provision stricter, the RBI said the provisions as applicable to willful defaulters would apply to the fraudulent borrowers including the promoter director and other whole time directors of the company insofar as raising of funds from the banking system or from the capital markets by companies with which they are associated is concerned, etc.
"In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from banks and financial institutions for for a period of five years from the date of full payment of the defrauded amount," it said.
After this period, it is for individual institutions to take a call on whether to lend to such a borrower, it said, adding, the penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their complicity.
"No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued," it said
Click Here To Read My Blog On Frauds
Another Blog on Rising NPA Is Beyond Control
Besides, the central bank will set up a Central Fraud Registry that can be accessed by all banks to identify borrowers having committed frauds with any bank in the past.
The CBI and the Central Economic Intelligence Bureau (CEIB) will also share their databases with banks.
The concept of a Red Flagged Account (RFA) is being introduced in the current framework as an important step in fraud risk control, RBI said in guidelines for banks to deal with loan frauds.
"An RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more early warning signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may ultimately turn out to be fraudulent," it said.
No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts, it said.
Making penal provision stricter, the RBI said the provisions as applicable to willful defaulters would apply to the fraudulent borrowers including the promoter director and other whole time directors of the company insofar as raising of funds from the banking system or from the capital markets by companies with which they are associated is concerned, etc.
"In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from banks and financial institutions for for a period of five years from the date of full payment of the defrauded amount," it said.
After this period, it is for individual institutions to take a call on whether to lend to such a borrower, it said, adding, the penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their complicity.
"No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued," it said
Click Here To Read My Blog On Frauds
Another Blog on Rising NPA Is Beyond Control
'Majority of Union Bank's NPAs are from stalled projects': Arun Tiwary-DNA
Frauds are not on the rise, but fraud detection definitely is, with a red alert from the Reserve Bank of India (RBI). Arun Tiwary, chairman and managing director, Union Bank of India, tells Manju AB that they are taking a serious note of frauds by first impounding the passport of the promoters of defaulting companies, putting an external agency to assess the personal assets of borrowers. India, he says, is a jumbo economy of 1.25 billion population, and it will be on the tarmac for some more time before the take-off. "The response and response time of the government have improved and we are looking forward to be part of the growth story," he said. Excerpts from the interview:
Are corporate frauds going up? What steps are banks taking to protect the accounts?
Frauds have not gone up but the detection of frauds has. Banks have beefed up their fraud monitoring and detection mechanism. But RBI is now saying that if one lender declares an account as fraud then all banks with an exposure to the particular account will have to sit and decide. Banks are now getting proactive. It is not fair on the system if some banks report fraud and others do not. RBI has also come out with the exhaustive white paper on fraud detection and reporting which will further encourage banks to report frauds.
Why did your banks' quarterly net profit come down by 23.4%?
The operating profit has gone up by Rs 600 crore. Of this, the tax outgo was Rs 200 crore and another Rs 400 crore was provision for non-performing assets or the bad loans. Though NPAs have come down, when the NPAs mature the provisioning also goes up. About 58% of our total NPAs are from the stalled projects. Once the projects go on stream, all these accounts will be earning interest for us. Tide will turn in our favour. Key ministries involved in the stalled projects are in dialogue on how they can collectively put the stalled projects back on stream.
Have the NPAs peaked for the bank?
NPAs are certainly coming down. In September quarter, the slippages were Rs 1,968 crore and it came down to Rs 1,738 crore in third quarter ended December 31, 2014, and for the fourth quarter the bank saw slippages of just Rs 1,547 crore. If you look at recoveries, they have been robust with Rs 738 crore in September, and have gone up to Rs 1,112 crore in the fourth quarter. And one must remember that there has been no bullish growth in credit. The provision coverage ratio has also climbed to 59.23% in the fourth quarter from 57.97% in the second quarter. We have sold Rs 740 crore (worth of bad loans) to the asset reconstruction companies (ARCs) during 2014-15 and Rs 335 crore in the fourth quarter.
What happens on the restructuring front?
For the whole year 2014-15 we did a restructuring of Rs 5,002 crore, and the restructured accounts that ceased to attract higher provisioning were Rs 2,975 crore, which has become standard. We have a pipeline of Rs 1,300 crore loans to be restructured where applications have been received in March from the power sector and road projects. In the fourth quarter, Rs 2,366 crore (worth of loans) were restructured, out of which Rs 840 crore is from a single account.
The bank has also brought down bulk deposits sharply?
We have retired about Rs 18,362 crore of high-cost deposits during 2014-15. In March 2014, the bulk deposits were 12.60% of the total deposit base, now it has come down to 5.79%. Even within, we are looking at the savings bank which has grown 9.92% over the previous year, and the weekly average growth in our savings bank is about 10.5% over the previous year, which is one of the highest in the industry. So the focus is not on the current deposits where the branches at the end of the fourth quarter were getting large deposits into the current accounts that can vanish in the next couple of days. We have put a stop to such practices and the cost of funds is gradually coming down.
On the credit side, where would be the focus be?
We are very definite that the focus will be retail, small and medium enterprises (SME) and agriculture, and all the 4,081 branches will have to perform. These segments have gone up by 24% year on year. Large loans and large deposits are not enough. We need to spread our risk and expand our customer base. We have excess investment in government bonds (statutory liquidity ratio, or SLR) at around 27%, about 4.5% higher than the statutory requirement. We are trying to bring down these investments by putting more money into loans.
Have you funded any projects under the 5:25 scheme? (5:25 is a popular financing scheme introduced by the RBI that allows banks to extend long-term loans of 20-25 years to match the cash flow of projects while refinancing them every five or seven years.)
We have funded four projects. Nobody wants to kill the economic value of a project that is on the ground. We have no right to kill it. If it can be salvaged, it should be. If the cash flows are supportive, we need to provide support. In most large infrastructure projects, the loan agreements were such that if the project life is 25 years, bankers squeeze the repayments in 15 years.
http://www.dnaindia.com/money/report-majority-of-union-bank-s-npas-are-from-stalled-projects-arun-tiwary-2086703
Frauds have not gone up but the detection of frauds has. Banks have beefed up their fraud monitoring and detection mechanism. But RBI is now saying that if one lender declares an account as fraud then all banks with an exposure to the particular account will have to sit and decide. Banks are now getting proactive. It is not fair on the system if some banks report fraud and others do not. RBI has also come out with the exhaustive white paper on fraud detection and reporting which will further encourage banks to report frauds.
Why did your banks' quarterly net profit come down by 23.4%?
The operating profit has gone up by Rs 600 crore. Of this, the tax outgo was Rs 200 crore and another Rs 400 crore was provision for non-performing assets or the bad loans. Though NPAs have come down, when the NPAs mature the provisioning also goes up. About 58% of our total NPAs are from the stalled projects. Once the projects go on stream, all these accounts will be earning interest for us. Tide will turn in our favour. Key ministries involved in the stalled projects are in dialogue on how they can collectively put the stalled projects back on stream.
Have the NPAs peaked for the bank?
NPAs are certainly coming down. In September quarter, the slippages were Rs 1,968 crore and it came down to Rs 1,738 crore in third quarter ended December 31, 2014, and for the fourth quarter the bank saw slippages of just Rs 1,547 crore. If you look at recoveries, they have been robust with Rs 738 crore in September, and have gone up to Rs 1,112 crore in the fourth quarter. And one must remember that there has been no bullish growth in credit. The provision coverage ratio has also climbed to 59.23% in the fourth quarter from 57.97% in the second quarter. We have sold Rs 740 crore (worth of bad loans) to the asset reconstruction companies (ARCs) during 2014-15 and Rs 335 crore in the fourth quarter.
What happens on the restructuring front?
For the whole year 2014-15 we did a restructuring of Rs 5,002 crore, and the restructured accounts that ceased to attract higher provisioning were Rs 2,975 crore, which has become standard. We have a pipeline of Rs 1,300 crore loans to be restructured where applications have been received in March from the power sector and road projects. In the fourth quarter, Rs 2,366 crore (worth of loans) were restructured, out of which Rs 840 crore is from a single account.
The bank has also brought down bulk deposits sharply?
We have retired about Rs 18,362 crore of high-cost deposits during 2014-15. In March 2014, the bulk deposits were 12.60% of the total deposit base, now it has come down to 5.79%. Even within, we are looking at the savings bank which has grown 9.92% over the previous year, and the weekly average growth in our savings bank is about 10.5% over the previous year, which is one of the highest in the industry. So the focus is not on the current deposits where the branches at the end of the fourth quarter were getting large deposits into the current accounts that can vanish in the next couple of days. We have put a stop to such practices and the cost of funds is gradually coming down.
On the credit side, where would be the focus be?
We are very definite that the focus will be retail, small and medium enterprises (SME) and agriculture, and all the 4,081 branches will have to perform. These segments have gone up by 24% year on year. Large loans and large deposits are not enough. We need to spread our risk and expand our customer base. We have excess investment in government bonds (statutory liquidity ratio, or SLR) at around 27%, about 4.5% higher than the statutory requirement. We are trying to bring down these investments by putting more money into loans.
Have you funded any projects under the 5:25 scheme? (5:25 is a popular financing scheme introduced by the RBI that allows banks to extend long-term loans of 20-25 years to match the cash flow of projects while refinancing them every five or seven years.)
We have funded four projects. Nobody wants to kill the economic value of a project that is on the ground. We have no right to kill it. If it can be salvaged, it should be. If the cash flows are supportive, we need to provide support. In most large infrastructure projects, the loan agreements were such that if the project life is 25 years, bankers squeeze the repayments in 15 years.
http://www.dnaindia.com/money/report-majority-of-union-bank-s-npas-are-from-stalled-projects-arun-tiwary-2086703
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